LNG World Shipping

Sovcomflot boss Sergey Frank targets growing LNG demand

Sergey Frank: 'This is the right time to change our equipment, to go for LNG'

Shipowner Sovcomflot will lift the first cargoes from Yamal LNG this autumn. President and chief executive Sergey Frank ponders Arctic opportunities and small-scale investment and explains why he has faith in LNG as the marine fuel of the future

Sovcomflot boss Sergey Frank, caught between meetings at Gastech with “30 minutes sharp” to offer LNG World Shipping, turns out to be in a relaxed and expansive mood.

Picture New York’s Times Square in 1900, he says. A photo from that year shows the famous intersection of roads filled with horse-driven carriages. Compare that to an image of Times Square in 1910 and already the city landmark is filled with cars. This is how quickly technology can change, Mr Frank concludes.

The Sovcomflot president and chief executive believes global shipping faces that scale of change, as a new generation of LNG-powered vessels replaces ships that use oil-based fuels.

“The deal completes two years of intensive work by Shell and Sovcomflot, covering technical, commercial and logistical aspects, and intellectual concentration,” Mr Frank says. “For us, aframaxes are a good place to start. We are the number one aframax shipowner and Shell is the number one charterer of aframaxes.

“The aframax, with its relatively short steaming times, is the workhorse of the market. There is a good density of traffic between the ports of loading, in Russia and the Baltic region, and there is a predictable sailing pattern between Primorsk and Rotterdam.

“Most traffic is five days’ steaming. That offers a certain predictability and stability. That’s very helpful in taking the first, small step – particularly when you don’t yet have access to global infrastructure. We are confident that we can make these ships commercial – while also being significantly cleaner and greener.”

“We need to grow our fleet of LNG-fuelled aframaxes, step by step, to create a uniform fleet,” Mr Frank says. “We are working with Rosneft and with Hyundai Heavy Industries and with Russian shipbuilders to build up that sophistication at Sakhalin Island, which is a major centre of oil production that mainly uses aframaxes.

“We think this is the right time to change our equipment, to go for LNG. We expect China to introduce severe emissions legislation because of its concerns about the environment. And we expect other shipowners to follow.”

There is talk of an initial public offering. In May, Russian economy minister Alexei Ulyukayev said the government might raise US$357 million from selling 25 per cent of Sovcomflot. And in March, Sovcomflot completed sea trials and mooring trials on its 172,600mł ice-class newbuilding, Christophe de Margerie, “the world’s most powerful LNG carrier”.

DAT technology will enable Christophe de Margerie and its 14 sister-ships to sail year-round, slicing stern-first through ice up to 1.5m thick at 5.5 knots, thanks to dual-fuel diesel electric (DFDE) engines fitted with three powerful azipod units.

“Sovcomflot is not a casino player; we are industrial players and efficient utility players. We see LNG as an organic industry, to be judged project by project.”

Sovcomflot is the largest owner of azipod-propelled ships. “Every day, around the world, our ships have 36-40 azipods running under the water,” Mr Frank says. “It makes all aspects of the operation different and special – and now we will have the most powerful LNG carrier on the water with 45MW of propulsion power.

“This achievement reflects our years working in these waters with smaller ships that have used the double-acting concept since 2007. We have built up a track record and have trained a generation of masters, chief engineers and electrical engineers.”

That track record will be tested very soon. Yamal LNG may load its commissioning cargoes as early as October. Safety will be paramount. If the Arctic is a sensitive environment, it is also very hard to reach, should something go wrong.

Sovcomflot operates its own safety procedures for Arctic waters, based on its experiences off Sakhalin Island, Mr Frank says. It works with Murmansk-based Rosatomflot, which operates a fleet of nuclear-powered icebreakers, as well as tugs and support craft.

Under the Portoflot project, Rosatomflot is contracted to supply three ice-class Arc4 escort tugs, one port icebreaker and one icebreaking tug to the Yamal LNG project to 2040.

Here, Mr Frank prefers not to be drawn. “We will consider opportunities for new investment project by project,” he says. “If the project fits our investment criteria and our risk-management objectives, we could certainly invest in more ice-class LNG carriers. Why not?”

“We do not see much fun in buying speculative assets and hoping – because of market ups and downs – that we find ourselves, through luck, in the right place at the right time,” he says. “That approach makes the [shipping] industry operate like a casino.

“Sovcomflot is not a casino player; we are industrial players and efficient utility players. We see LNG as an organic industry, to be judged project by project. We see no need to take exotic steps – we are happy to build our LNG shipping business by selecting those projects that fit our philosophy.

“It’s the same approach we’ve taken with our tanker fleet over the last 10 years. Here, we’ve achieved average annual business growth of 12-15 per cent a year, even though in that period we had maybe two years of market growth, in 2014-2015.”

“One thing we are looking at is LNG bunkering. We are evaluating the opportunity here, particularly along Russia’s rivers”

Traditionally, shipowners order LNG newbuildings against long-term LNG supply contracts, between export project and named buyer. How will Sovcomflot respond to the shift away from the long-term deals that have underpinned both project approvals and ship orders?

“We prefer to work on any given project from day one, so we have to adjust,” Mr Frank concedes. “That’s the most favourable approach, particularly if a project involves some degree of operational complexity or involves working in a harsh environment.

“This is where we have experience and can offer a competitive advantage that adds value. We’ve never been enthusiastic about taking massive positions for the sake of it… But we are looking at new projects, yes, and most probably those projects will be in the north.”

Small-scale

Speaker after speaker at Gastech this year highlighted the opportunity that lies in small import markets, particularly for gas-to-power projects.

“Gas to power is a big saga,” Mr Frank says. “Of course, we follow what the big names are doing with such projects. But for us the question is, where is the marine component? We need to be patient. We need to wait. Gas to power is now a mainstream activity in LNG – but it’s not the only way for the LNG business to progress.”

Meanwhile, Sovcomflot has yet to venture downstream, into LNG small-scale distribution. That may soon change. The company is considering a couple of ventures – although Mr Frank hesitates over whether these are small-scale LNG projects.

“One thing we are looking at is LNG bunkering,” he says. “We are evaluating the opportunity here, particularly along Russia’s rivers. Russia has a huge network of rivers with definite potential for LNG as a fuel.

“There’s good potential to build the equipment – that’s to say, small ships that are not ocean-going – on very competitive terms. Russia has specialist companies that can deliver these. We are looking in that direction certainly.

“Frankly, this is not the most important song we plan to sing. With small-scale, it may be slightly more difficult for us to extract synergies from our current operations.”

Does this mean that Sovcomflot plans to order Russia’s first LNG bunker-supply ship? “Yes, well why not?” Mr Frank concludes. “Maybe we could consider such a ship for the Baltic region.”